Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

I think the following email exchange pretty much expresses my current thoughts on the equity markets from my perch across the pond. A portfolio manager (PM) recently wrote me to say:
 
“I was a heavy profit-taker today (May 29, 2009). Here are 10 reasons:

1. June is likely to be a month with a negative geopolitical surprise. There are several possibilities.

2. VIX closed at 28.92 today versus over 56 when I advocated buying and bought heavily.

3. Window-dressing was apparent at the end of this month. It's like polishing a broken glass.

4. A lot of shorts have covered because of speculators buying with the ‘hope’ of making a fast buck. Much internal market power has been dissipated.

5. I talked with people who now feel their IRAs are safe. I don't think so! Stocks are not bargains considering the projected EPS and high PEs.

6. From here on, the price of oil going up will hurt the economy like a hidden, extra tax. The increased price is supported by questionable fundamentals.

7. There never has been a successful test of the early March low. History shows this has to happen sometime relatively soon.

8. The one thing you can count on is that the market is unaccommodating. Fools jump in when experienced investors are cautious.

9. I don't think the economy is really getting better; there's a lot of bullish talk, but people are still losing their jobs, and the national debt is accelerating.

10. My intuition tells me to be careful now. Higher interest rates aren't that far away; the debt has to be financed.”

My take: I think it's a mistake to get too bearish right here. Cautious, yes - but bearish, no!

1. I'm talking to a lot of PMs here in Europe, and they're way under-benchmarked to stocks (especially to the US). They're close to being forced by their bosses to rebalance to at least a 60% stocks / 40% bonds weighting.

2. Furthermore, the bulk of the economic stimulus monies (TALF, PPIP, etc.) is going to hit between June and September. That could make the economic numbers look much better than most expect and cause businesses to restock inventories, buy equipment, and actually hire some folks.

3. This result could also compress credit spreads, which will allow corporations / individuals to roll their debt. Not just long-term debt, mind you, but lines of short-term credit, working capital debt, etc.

4. Whether this turns out to be a rally in an ongoing bear market, or a new bull market, remains to be seen; but, if stocks don’t correct soon, I think you'll see another leg to the upside that will be larger than most expect, despite my cautious stance for the past month.

His reply:
 

“I agree with you about getting too negative; caution is more prudent for the reasons you cited. I am over-weighted in cash right now, but I still have maybe 30 stocks (long) and no shorts. Therefore, my actions match your wisdom.

"For the first time, I've felt extra cautious because of all of the potentially negative geopolitical possibilities I recognize, one of which could occur in June. That's most of my concern. Actually, if it weren't for the geopolitical possibilities, I feel the rally could extend until maybe the end of July."

The call for this week: Well, I'm still traveling in Europe, but, if stocks don’t correct, I would anticipate another leg up into quarter’s end. My upside target, if the indices re-energize, is 1050 on the S&P 500 (SPX).

To play such a move, if it develops, buying the index of your choice, with a concurrent downside hedge (read: options) is the way to go; it just makes all the sense in the world.